Edited version of private advice

Authorisation Number: 1052276197781

Date of advice: 20 August 2024

Ruling

Subject: Deductions

Question 1

Can the Taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) of the amount lost as a result of a scam that the Taxpayer was subjected to?

Answer

No.

Question 2

If the loss is not deductible under section 8-1 can the amount be treated as a second element of cost of the depreciable asset sold?

Answer

No.

Question 3

If the loss is not deductible under section 8-1 and it not second element of cost is the amount deductible under section 40-880 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You carry on an excavation business.

You own heavy equipment and machinery used in the course of carrying on your business which includes tippers, bobcat, rollers and excavators.

You fund your capital equipment purchases, usually via a commercial loan where the financier holds a lien over the item of equipment and once the debt is paid the lien is discharged.

Once you pay out the loan, the lien over equipment can be discharged.

Once the lien is removed the item of equipment can be sold if no longer required.

The discharge of lien and sale to a third party can also occur simultaneously.

You purchased a new excavator on a specified date for a specified amount, which was financed under a chattel mortgage with Company A.

You usually deal directly with Person A from Company A for your financing needs and your typical form of communication is email.

On a specified date, you commenced negotiations to sell the excavator for a specified amount.

On a specified date, you emailed Person A to obtain your outstanding loan balance to allow you to fully settle and discharge the loan in preparation for the sale of the excavator.

On a specified date, you received an email from Person B from Company A who advised that the final payout figure was a specified amount. The banking details of Company A were included in the email.

You did not payout the loan as you did not have sufficient funds.

You sold the excavator on a specified date for a specified amount, and you received the payment from the buyer the following day.

On a specified date you emailed Person A again to re-confirm the loan pay figure.

On a specified date you received an email with an updated payout figure of a specified amount which included banking details. The email you received was from Person C whom you had assumed was from Company A as the email address contained similar Company A email address and Person A was copied into the email.

On a specified date your partner attended Bank A and made a telegraphic transfer of a specified amount to a Bank B account, which was provided in the email on Person C.

You emailed Person B and Person A on a specified date to advise that the payout figure had been made and you requested a closing letter to confirm the account was settled in full.

On a specified date you emailed Person A and Person B again requesting the closure letter. Person A phoned you advising that Company A finance had not received the funds nor had Person A received any of the emails that she had previously been included it. Person A also advised that they do not bank with Bank B. At this point you realised that you had been scammed.

On a specified date you reported the scam to Bank A. Person A suggested to you that you have all your passwords checked. Due to the possibility your computer had been hacked you engaged Company B to check your computer.

On a specified date you reported the scam to the police. You provided us with a copy of the police report.

You were unsuccessful in recovering the money.

You entered into a secondary financial arrangement with the financier as you were unable to settle the outstanding amount on the loan. The security over the excavator was discharged however your obligations to repay the outstanding amount remains.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-45

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 section 108-5(2)

Reasons for decision

Question 1

Is the amount you lost as a result of the scam deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The money that you lost as a result of a scam is not an allowable deduction under section 8-1 of the ITAA 1997 as the payment is capital in nature. You paid an amount to discharge your financial obligations for the equipment and had the scam not occurred the payment would not have been deductible. The fact that the financer did not receive the payment does not alter the nature of the payment.

Detailed reasoning

Section 8-1 allows a deduction for any loss or outgoing necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income however you cannot deduct a loss to the extent the amount is an outgoing of capital, private or domestic in nature or a provision prevents it from being deductible.

The relevant elements that need to be satisfied for the amount to be deductible under section 8-1 are as follows:

• the outgoing is incurred in the course of carrying on a business activity.
• there is the relevant nexus between the loss or outgoing and the carrying on of a business for the purpose of gaining or producing assessable income, and
• the outgoing is not of a capital or private or domestic nature.

In Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 (Charles Moore Case) the High Court suggested that three questions determine the deductibility of losses caused by dishonesty under section 8-1 of the ITAA 1997:

    (i)        Is the 'occasion of the loss' found in the income-earning activities or business operations of the taxpayer?

   (ii)        Is the nature of character of the loss of that 'kind of casualty, mischances or misfortune which is a natural or recognised incident' of the income-earning activities or business operations?

  (iii)        Is the loss one of capital, or a private, domestic or capital nature?

In the Charles Moore Case, the previous day's takings of the taxpayer's department store were stolen at gunpoint from two employees while on their way to the bank. It was business practice every morning for the two employees to take the previous days takings to the bank and pay them into the credit of the taxpayer. The High Court allowed a deduction for the loss on the grounds that the act of banking takings was an integral part of the taxpayer's business activities and the risk of robbery was inherent to the act of banking.

In your case, you paid an amount to discharge a loan amount for an excavator. Had you not lost the money due to scam the payment would not have been an allowable deduction to you. Therefore, the money you lost is capital in nature and accordingly, is not deductible under 8-1 of the ITAA 1997. The fact that the financer never received the payment does not alter the nature of the payment.

Question 2

Is the amount you lost as a result of the scam a second element of the cost base of depreciable assets under section 40-190 of the ITAA 1997?

Summary

The expenditure you paid that you lost due to a scam associated with repaying the loan does not form part of the second element cost of a depreciating asset under section 40-190 of the ITAA 1997.

Detailed reasoning

Section 40-190 for the ITAA 1997 is about the second element cost of a depreciating asset. It states the second element is the amount you are taken to have paid under section 40-185 for each economic benefit that has contributed to bringing the asset to its present condition since the time you started to hold the asset and expenditure you incur that is reasonably attributable to a balancing adjustment event occurring for the asset.

In your case, the expenditure you paid that you lost due to a scam associated with repaying the loan does not form part of the second element cost of a depreciating asset under section 40-190 of the ITAA 1997. This is because it is not an expenditure for an economic benefit that has contributed to bringing the asset to its 'present condition and location' nor is it expenditure incurred that is reasonably attributable to a balancing adjustment event.

Question 3

Is the amount you lost as a result of the scam deductible under section 40-880 of the ITAA 1997?

Summary

The amount that you lost due to a scam is not deductible under section 40-880 of the ITAA 1997 as section 40-880(9)(b)(ii) of the ITAA 1997 excludes a deduction being allowed when the amount is in relation to a loan.

Detailed reasoning

Section 40-880 allows certain business expenditure to be deducted in equal proportions over five income years where the requirements of the provision are met. It is a provision of last resort. In other words, this section only applies to expenditure if no other provision allows or denies a deduction or otherwise takes the expenditure into account. Expenditure is deductible under section 40-880 only if it is not taken into account in some way elsewhere in the income tax law or a deduction is not denied by some other provision.

Subparagraph 40-880(9)(b)(ii) prevents a deduction under section 40-880 of the ITAA 1997 where the amount is for a loan.

In your case, the amount you lost due to a scam was in relation to a loan, therefore you are not entitled to a deduction under section 40-880 of the ITAA 1997.